The Ugly Truth About Where The 2nd Half Earnings Growth Miracle Is Supposed To Come From

The S&P 500 continues to make higher and higher, more record-er highs predicated, as FactSet notes, on the faith in soaring expectations for much higher earnings growth for the index in the second half of 2014. Combining the reported earnings for Q1 and the estimated earnings for Q2, the first half (1H) blended earnings growth rate for the S&P 500 is 3.7%. However, combining the estimated earnings for Q3 and Q4, the second half (2H) estimated earnings growth rate jumps to 9.9%. Given this expected improvement in the overall earnings growth rate, which sectors and companies are projected to see the largest turnaround in earnings growth in 2H 2014 relative to 1H 2014? (Spoiler Alert: the answer should make you nervous).

Overall, nine of the ten sectors are projected to see higher earnings growth in 2H 2014 compared to 1H 2014. While the Telecom Services sector is expected to report the highest earnings growth of all ten sectors at 30.8%, it is not predicted to report the sharpest rebound compared to 1H 2014. This growth rate of 30.8% only reflects a slight improvement over blended earnings growth of 26.7% for 1H 2014.

The sector expecting the largest overall turnaround in earnings growth in 2H 2014 compared to 1H 2014 is the Financials sector. This sector is projected to see earnings growth of 15.5% in the 2H of 2014, compared to a decline in earnings of 2.7% in 1H 2014.

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This miracle hockey-stick save for financials - upon which the entuire S&P 500 index is now so dependent upon - has one small (very large) problem. Financials will not make this up via lending (or NIM hopes from a dfream of steepening curves - which have been shown to be a fallacy in the last few years); it will have to come from trading revenues... and that means one thing...

Volatility has to rise...

So in order for financials earnings to explode as is priced-in to the S&P 500, the market itself must experience notably more volatility... Be careful what you wish for.